My post last week on the decision to decrease the real wages of those reliant on awards for their pay by the so-called Fair Pay Commission sparked a somewhat heated thread, largely around the contention by some commenters that it was some sort of undisputed law that a rise in minimum wage rates leads to greater unemployment. Apparently, too, anyone who advocates anything other than a real wage cut for workers on low pay is morally bankrupt, and personally responsible for unemployment.
So, I was interested to read Ben Eltham’s piece in New Matilda today, which covers the FPC decision, and also segues into a valuable discussion of other aspects of employment in Australia. But what is key in the current context is Eltham’s citation of a study by John Quiggin and Steve Dowrick:
When John Quiggin and Steve Dowrick analysed the literature on minimum wages in 2003, they found little relationship between minimum wages and employment levels, but a very strong relationship between low minimum wages and increasing inequality.
Countries like the United States with low minimum wages had much greater levels of inequality than countries with higher minimum wages like Australia and the members of the European Union. The reason appears to be that holding minimum wages low doesn’t destroy many jobs, but it does have a broad impact on inequality by holding the wages of low-paid workers down across the board. “There is little reason to expect strong employment benefits from freezing minimum wages in nominal terms, that is, reducing minimum wages in real terms,” Quiggin and Dowrick concluded.
The Quiggin and Dowrick paper can be found here [link to pdf].
“There is little reason to expect strong employment benefits from freezing minimum wages in nominal terms, that is, reducing minimum wages in real terms,” Quiggin and Dowrick concluded.
I think they’ve got that one right. You should expect slight to moderate benefits depending on the economic conditions.
Funny thing, all the places i have ever worked only put on extra people when their markets have expanded. Has anyone out there ever worked in a place where extra people were put on just because wages dropped? However, the critical issue is not the min wage but what is left after the effects of taxes, levies welfare etc. are taken into account and how this compares with what other people are getting.
Some time ago I estimated that, if the share of GDP going to wages and the min wage as a % of the average wage had remained at the level enjoyed during the high growth, low unemployment 60’s someone on the min wage would be about 40% higher than it is now. (Sorry – lost the calc.) The average wage would also be higher because the % of GDP going to wages has also dropped which is part of the reason that our economy has been depending on rising debt to keep growing. There is a lot of catching up to do and the key question is how can this be done.
The problem with using wage increases as the main means of reducing inequality is that wage increases are often used to justify price increases that leave the worker not much better of than they were before the pay rise. Not so big a problem if the $ min wage increase is passed on but a bigger isue if % increases to the min wage are passed on.However, this Equally important is how this compares with what other people are getting base issue is minimum purchasing power after tax, welfare payments etc.
The government should be considering a number of strategies for improving equality that don’t depend on wage increases. Perhaps they should consider increasing taxes to fund a regular per capita payment as part of the strategy for improving equality and reducing the countries dependance on debt to keep the economy growing.
This is like stating the obvious. Of course ‘equality’ is closer if wages are artificially closer than what they should be. Why is the purpose equality? And if it is, why not put the minimum wage up to the average wage or implement a maximum wage? Because everyone knows that such measures would be unfair. But when its alittle bit unfair, so much so that we can’t really see any ‘economic changes’ then apparently its OK. Of course there is only a tiny effect on economy. What we are talking about with minimum wage isn’t really about employment or the economy – its about wealth redistribution. Enforcing a minimum wage is no different then a tax.
I suppose all those wage earners above the minimum would reckon they deserved their pay, if not more. Seems a lot of them think the low paid don’t.
John D
Apparently, fiscal policy during the Howard Years resulted in the largest transfer of wealth and income from the rich to poor, and thus reduction in inequality in Australia’s history.
The arguments on the original thread supporting the FPC’s decision are not really all that convincing. They’re unjustified speculation based on no actual supporting evidence. And I feel safe in suggesting that the people making those arguments are not those people who got a nice shiny wage cut courtesy of the FPC.
Taken to their (il)logical conclusion, the FPC should, in fact, have made a cut in nominal wages too, as surely that would have further increased employment.
This thread is no doubt going to shed just as little light on the reality of life as a low-paid worker in Australia as the last one. Perhaps those FPC supporters, amusingly including one “Labor Outsider”, should just recognise their position as ideologically aligned with WorkChoices and have done with it. No-one, whether you support low paid workers or you don’t, is arguing economics here. This is a political debate. Accept it and move on.
And like all political debates, ideology will trump commonsense and a better outcome for society.
Commenting without reading the full paper but… I question I have is whether the lower inequality in Australia and Europe, compared to the US, has a more fundamental reason than the minimum wage – essentially, the different tolerances of the different societies for inequality.
SaTP, that’s certainly what the ideologically-driven FPC decision did.
Inequality is all about regulation is it not? Deregulation of the labour market is really about reregulating, away from unions and throttled by government, business and of course the free market which drives down wages by forcing workers to compete for jobs with the developing world.
Arguably, the US is more committed to the free market which means their wages are more throttled by the ideology.
And who regulates the top end of town?
If we are to have a legislated minimum wage there should be scope to vary it by region. There are two good reasons. Firstly the cost of living varies by region. Secondly employment prospects vary by region.
In a remote part of the northern territory where jobs are a bit hard to come by it is silly to criminalise the creation of jobs that pay $8 per hour. In Sydney where the cost of living, especially accomodation, can be quite a bit higher than the rest of the country it is silly to assume that the same minimum wage will address cost of living concerns.
Labour markets and the cost of living vary by region. The EU does not have common legislated minimum wage. Neither does Canada. Australia ought to ditch the notion that one size fits all.
A minimum wage that varies by region could be achieve several ways. The obvious way would be for the federal government to repeal minimum wage laws and hand such powers to local governments. Althernative the fair pay commission or it’s replacement could be given the power to hear and rule on submissions for regional variations. However it is done we ought to abandon the notion that an unskilled worker in Angaston needs to be paid the same minimum wage as an unskilled worker in Kenmore. There circumstances are quite different.
there => their
“In a remote part of the northern territory where jobs are a bit hard to come by it is silly to criminalise the creation of jobs that pay $8 per hour.” – Terje
Maybe, but you’ve chosen a particularly poor example – the cost of living is much higher in the remote NT than in Sydney.
“And like all political debates, ideology will trump commonsense and a better outcome for society.”
Where have you been for the past 5000 years SATP? Technology always trumps ideology in the long run.
Any major ideological/social/economic shift in any civilisation is pretty much driven by the introduction of a major new technology that changes how production, services and information is generated and monetized.
Where have I been for the past 5000 years?
I wasn’t born for most of it.
Michael – as I said there are two parts to the argument. One relates to variations in the cost of living. The other relates to variations in the jobs market and employment prospects. The particular example you quote was making a point about the employment prospects not living costs.
Inequality is all about regulation is it not? Deregulation of the labour market is really about reregulating, away from unions and throttled by government, business and of course the free market which drives down wages by forcing workers to compete for jobs with the developing world.
Arguably, the US is more committed to the free market which means their wages are more throttled by the ideology.
That’s an interesting proposition as I thought median wages there were higher than ours.
There isn’t much point getting into this again. We have all made our points and it is probably just best to agree to disagree. However, Quiggin and Dowrick’s analysis – which is really just a literature survey doesn’t change the basic arguments.
Just a few points though.
Which european countries are they comparing Australia to? According to the most recent OECD data, inequality in Australia, as measured by the gini coefficient, was ranked 16th in the OECD, with a noticeably more highly skewed distribution than in European countries such as Denmark, Sweden, Austria, Belgium, etc. Europe is a pretty diverse place. It is clear that we do considerably worse than a bunch of them and better than a few of the. The minimum wage is just one factor influencing rates of inequality.
The minimum wage, as I argued in the last thread is a relatively blunt tool for reducing household inequality. First, there are employment effects (Quiggin is hardly an unbiased surveyor of that literature!) and second many minimum wage earners don’t live in low-income households. To repeat from the last thread. Nobody argued that there were likely to be LARGE employment effects flowing from a single FPC decision – a real wage cut of 2-3 per cent, with say an elasticity of 0.1 to 0.5 is simply too small. However, if one looks at the literature the elasticities for young and unskilled people are usually estimated to be at the top end of this range, and raising their wages at a time when many employers are looking to reduce their labour costs means that many people will in fact either lose their jobs or will take longer to find them than they otherwise would.
I am not against the low-paid. I simply want to see them supported with more effective measures than a minimum wage increase. As I said before, the government easily could support the thrust of the FPC decision and counter any effects on income inequality by either fundamentally reforming the taxation system or even by simply transferring additional funds to them for the next year or two. The cost of this would be dwarfed by the amount they have already shelled out to middle class household through the recent tax cuts and the stimulus payment.
Note that the Quiggin analysis doesn’t really analyse the efficacy of raising minimum wages during recessions – it focuses on the lack of a real wage overhang as existed in the early 1980s. Also, while the argument that if the elasticity is less than 1, workers will on average be worse off from a cut in real wages, this does not take into account that a better outcome can be achieved by allowing minimum wages to vary with the economic cycle and allowing tax-transfer policy to deal with the impact on poverty/inequality. Indeed, it is very simple to show that as long as the elasticity for some categories of workers is not zero, a real wage freeze during a recession, combined with targeted transfers to affected workers through the tax-transfer system can lead to higher overall welfare than a minimum wage increase.
Alister, you don’t know what you are talking about. I worked for the labour party and have been a member since the early 1990s. The idea that you can’t be in favour of freezing minimum and award wages and be a true labour supporter is ridiculous. The history of the accord should at least tell you that there are circumstances that can warrant such freezes. We can of course debate whether this is one of them but the Hawke government did more to slow the rate of nominal wage growth of minimum/award workers than the Fraser government did!
That said, I don’t have the time or inclination to get into another debate about this, but please at least accept that I want to see the disposable incomes of the low-paid be targeted for policy purposes, and simply see this as more effective than targeting their nominal wages.
There’s a neat trinity of stories about suppossed exploitation of foriegn workers in the SMH. Main one at http://www.smh.com.au/national/foreign-students-exploited-as-slaves-20090714-dk52.html
I should be appalled at this but of course by being sensible what I should be seeing is the opportunities lost for Australians currently on the dole to work in those jobs for free or a tiny amount of money. Think of the vital experience these employers are offering!
And hey, those nice employers are offering accomodation as well!
I take a slightly different perspective. Doesn’t anyone else find it outrageous that people are treated like commodities? To my mind (a point I make on my blog occasionally) there can only be equality when we collectively abolish wage slavery.
And if Rudd Labor were really serious about protecting minimum wage earners they’d legislate for increased wages and give the working poor, not the rich, real tax cuts. They won’t because in reality they believe the lie that wage increases mean job losses.
The real question to my mind is what is causing the explosion of unemployment in much of the developed world? Certainly it is not ‘high’ wages. The minimum wage in the US for example varies from state to state but is around US $6 to $7 per hour – almost US $4 lower than in Australia. Yet unemployment in the US is headed for double digits.
There is something more systemic going on than the level of wages. Cutting wages is a response of the capitalist class to the failure of their system. The level of wages is not the cause of that failure.
Perhaps Marx was right in identifying the tendency of the rate of profit to fall as being at the heart of the crisis ridden capitalist system.
Good to see you getting with the program tssk. In the glorious free market, unburdoned by nasty government regulation, these charitable employers are offering their workers necessary experience free of charge! And providing accommodation.
And the lefty SMH has the hide to call it slavery!
Well I’m not totally on board yet Adrian. While some would be praising the free market I’m more likely going to make sure my business goes to a hairdresser that is well paid and happy.
My view is, if someone is holding a razor to my throat or scissors to my head I want them to be well paid, well fed and well happy!
Devildog #17 “That’s an interesting proposition as I thought median wages there were higher than ours.”
You may be right but I was responding to Robert’s thoughts on different rates of inequality and my own ideas on the mechanisms behind inequality.
“The obvious way would be for the federal government to repeal minimum wage laws and hand such powers to local governments.”
I do not know about your council, TerjeP, but I need to roll out the old ‘putting a fox in charge of the chook house’ factor, here.
Our council would dearly love that power as they are predominantly small business people who would happily drop the minimum wage to 5 dollars an hour to service their restaurants, video shops etc.
And then remind us all of their charity in providing employment opportunities.
Gerard Henderson has a ripper article at http://www.smh.com.au/opinion/fair-work-makes-no-sense-in-gfc-20090713-dir0.html?page=-1
Did you know that he, Costello and Howard convinced Keating to bring about employment reform? Also, more talk about the outragous Harvester Judgment that priced workers out of work.
LO,
I agree that it’s blunt, but I’ve yet to see another solution offered that will ensure a fair balance between business profits and worker wages.
Just thought it’s worth pointing out that wages towards the higher end of town have been significantly reduced over the past year in a number of industries, in nominal terms, not just real terms.
I happen to know that in consulting, the big firms are offering their employees significant (ie 50%) pay cuts or 50% job losses, and they’re taking the pay cuts.
They’re not being reduced to the minimum wage, but let’s dispell the myth that it’s only those on minimum wages who are receiving pay cuts at the moment.
I find the moralising here a bit hard to bear. It’s fine to say there’s not much evidence supporting low minimum wages and higher employment, but let’s accept that the data is almost impossible to interpret. Comparing different countries is not adequate, as too much differs between them over time. Comparing data from one country over time is required, and all factors other than the minimum wage rate need to be reliably removed. This is nigh on impossible.
So we revert to our moral position yet again.
But Desipis. The trickle down effect! And look how it is in the US. The working poor do have more now than they did years ago. More work at least.
“My view is, if someone is holding a razor to my throat or scissors to my head I want them to be well paid, well fed and well happy!”
Well that covers one area, but what about another important scene? If only the fear of dribble on the latte could be used to ensure those hospitality wage and conditions were fair and reasonable.
LO, it’s all very well and good to claim John Quiggin is biased on this issue, but why not actually read the report? Actually, he’s just reporting on a pretty big issue in the economics literature from the past decade – look up Brad De Long if you want a different perspective, I’m hopping you won’t think he’s also biased. I
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You won’t hear any arguments from me about improving the take-home pay and marginal tax treatment of low income earners, by the way.
Gerry Henderson’s claim about the Harvester judgment is remarkable – although I recall Ian Harper making a similar claim in one of his few incursions into the field of labour market regulation prior to being elevated to His Fairness by the Coalition.
McKay Harvester appealed Higgins’ decision to the High Court on constitutional grounds and the decision was overturned. McKay was off the hook and the agricultural implement union, bankrupted by its ongoing battles with McKay, didnt appear again in the Arbitration Court until 1925.
It’s strange that people readily accept that taxing cigarettes and alcohol reduce their usage, but seem to think such rules do not apply to labour. Businesses will employ someone as long as it is profitable to do so – that is, if the return from their employment is greater than the cost. Increase the cost, and unemployment will go up – it really is that simple.
Of course, if your argument is that a slightly higher unemployment rate is a worthwhile cost, then make that case (as you have done with the equality issue) – but arguing the relationship doesn’t exist is nonsense.
Now… about equality: an increasing gap in wealth is simply not a problem if everybody is getting richer. The analogy I’ve used in the past with regards to the wealth distribution is traffic flow. The faster traffic flows, the bigger the gap between cars – especially between the first and last car. When traffic is congested, they are all closer together, but this is hardly an ideal outcome. This fact cannot be changed – it is a law of physics – simple mathematical distribution. Attempts at reducing this gap will slow traffic… but at least we’d be more equal, right?
I agree Fleeced. In an ideal world everyone but me would be barred from my lane when driving.
Or to put this in a wage perspective…the lower the min wage the more money for the high paid! Yay for analogies!
Taking up on Fleeced’s pertinent analogies, I think that these hairdressing salons and restaurants that are
exploitinggiving workers valuable experience have the right idea.Reduce the cost of employment to nothing, and unemployment will likewise be reduced to zero.
Life’s so simple when you’re a libertarian. You know it makes sense.
Dand @3: You say:
The question is: What do you mean by “should be”?
You clearly don’t mean a “should be” determined purely by social justice considerations. However, to what extent do you think that “should be” should be determined by issues such as market forces, skill requirements, attractiveness of jobs, location etc.? Personally, I find it hard to be comfortable with a system that pays me a lot more to do a satisfying professional job compared with what is paid to those who have to work in some extremely unpleasant job.
It is interesting to note by the way that a survey run a number of years ago came up with the surprising result that the two Qld electorates that gave the highest life satisfaction ratings were Ryan (leafy middle class) and Hervey Bay (poor). The commentators thought that the crucial link was that both were relatively homgenous. When you think about it, inequality increases the envy of the losers and the insecurity of the winners.
It is also worth noting that the countries that were the leading winners in the first half of the twentieth century were countries that had unions with enough power to grow internal markets by pushing up the purchasing power of the workers. Perhaps there is a message here.
Nobody’s suggesting that wages be “taken” from the low paid… simply that people are not coerced into paying more for labour than it is worth. Of course, in reality, they won’t pay more than an employee is worth – they simply won’t employ them at all.
Such a strawman argument… as though the employees are slaves who have no say in the matter. Of course, if I offered zero wages, I would not expect too many applicants.
Of course bringing social justice into the issue of costs of carbon resource units clouds the issue. What matters is that some already have theirs so it’s all ok. Besides, if the working poor weren’t spending all their money on big screen tv’s (citation: some right wing mate of mine who knows a friend of a friend down the pub) this wouldn’t be an issue.
The poor are revolting! Let them watch Fox!
I have to agree with Adrian, Fleeed. It all seems so simple when you view the entire world as a supply and demand curve. Why not look at some evidence? Social scientists used to think drug and alcohol consumption was highly inelastic until a great deal of evidence established that increasing taxes would in fact curb consumption. Likewise, the simplistic theory of labour markets you like to propound just doesn’t accord with the evidence, unfortunately.
Using the case of the hairdresser named in the SMH article. Since neither the salon or the college supplying the labour are breaking the law surely other hairdressers in the area facing that competitive advantage will now have to lower the pay and conditions of their staff in order to compete. Essentially the market has been transformed with people working for nothing or paying for work. So in effect the dole should probably be abolished as it is artifically limiting the labour poor available to Australian small businesses.
Will work for food makes a comeback!
That’s just total rubbish… how do you think people run their businesses? How do you think they decide whether they can employ an extra person? They decide, based on whether the return is greater than the cost (of course, it’s rarely that easy to determine).
Fleeced – people make non-monetary business decisions all the time. Just think about all the sole traders out there who work for a fraction of what could earn in PAYG employment because they like the freedom. What is total rubbish is your belief that business owners are all utility maximising cost calculators … of course, calling a large body of peer-reviewed economic research “rubbish” is an easy way to make yourself feel better
That may be the case. But the evidence suggests that the cost of labour has very little impact on such determinations.
I think you’re confusing “market value” with “worth”.
Like LO, I’m not bothering to restate my points. But like LO I do take objection to the ignoramuses who assume that, because you think there are certain circumstances in which a cut in real minimum wages is warranted, you must be a corporate shill engaged in a plot against the working class.
They remind me of the RWDBs in the runup to the Iraq invasion who kept calling us all traitors and appeasers rather than engage with the arguments. It seems to me both groups care far more about tribal affiliation than real-world complexities.
Net market value is “worth”
Valueing (or paying) above (or below) net market value will either create a new net market value (possibly only temporarily) or else will collide with financial reality.
It is that simple.
Fleeced @ 32:
If you look at some of the common definitions used for poverty (eg. one is you’re in poverty if your income is less than half the average disposable income), then this situation you describe will lead to higher reported rates of poverty.
They probably should use a measure related to the actual living costs to measure poverty. But for some people its more important that society concentrate on relative wealth rather than absolute wealth of the poorest.
Absolutely… you don’t think that sheds an interesting light on minimum wage? People are willing to accept a low wage for a variety of reasons – not just to be their own boss… you think you’re doing them a favour by upping their wage a little, but if this results in a reduced number being available, then it’s not much of a favour.
I don’t believe that at all. Indeed, I made the explicit point that it’s not always easy to determine return. However, it beggars belief that a business would add the same number of employees without regard to an increased cost – and I don’t think you really believe it does.
As I said, if you want to argue that the negative effects of a minimum wage is the lesser of evils, then by all means go ahead – that could be an interesting debate. But pretending there aren’t any just makes you look silly.
Of course we can argue against those who disbelieve in raising the min wage all we like.
Fortunately in the real world to the relief of poor people everywhere the min wage has been kept static.
Fleeced – “That’s just total rubbish… how do you think people run their businesses? How do you think they decide whether they can employ an extra person? They decide, based on whether the return is greater than the cost (of course, it’s rarely that easy to determine).”
Here’s how I run my business. My client tells me there is more work to do that I can physically do myself, I employ someone at a rate that gives that person a wage high enough for them to consider the work attractive and returns me some net financial benefit, if the margins on the latter are too fine, I put my price up….isn’t that how supply and demand works?
Until last year, I was a sole trading contractor, I did my own thing for 3-4 years, now I employ someone, and I will probably try to employ 4 more people in the next year or two…so, it’s a micro-business. The person I currently employ only wants to work 2 days a week [the work is very physical], she works one other day at another micro-business. Over there the employers pay minimum wage [I pay minimum wage plus 10$/hr]. The other staff there are women, single mums, and they work full-time hours, and on the minimum wage, they receive some additional benefits from Centrelink. Now, I find that situation quite curious, how is that a person can be working full-time and receiving the minimum wage [they are being paid the casual rate, so it's higher to account for no sick/annual leave etc] and still be receiving welfare? In essence the govt, through welfare payments, is subsidising what I think is a fairly immoral employment strategy.
When I look at the minimum wage, I think, “who would I employ at that rate?” and the only reasonable answer is, that I would employ someone very young, with no work skills, few life skills, and a minimum of financial obligations. To keep people on minimum wage as they develop skills and competency is wrong and to me it seems rather an archaic and inhuman approach to employment, where aspiration and ambition is denied.
“If margins are too fine, I put my price up… isn’t that how supply and demand works?”
Clients, when confronted with a price increase, may send you a nice letter saying “We won’t be using your product/service after all, the price is more than we are prepared to pay”
That is exactly how suppy and demand works.
What if you’re a price taker rather than a price setter? How long would you continue to employ another person at zero or negative return? How many more people would you employ if your client offered you more work but at only the original rate?
Thing is furious if you were running a public company knowing about this arrangement with min wage workers getting copaid by the government by way of dole money you would be legally and morally obliged to look into it and possibly fire (then rehire at the lower rate) your employees.
So if something is valued differently by two different markets, what is it worth?
tssk, I think the reference is about family support payments rather than the dole.
“When I look at the minimum wage, I think, “who would I employ at that rate?” and the only reasonable answer is, that I would employ someone very young, with no work skills, few life skills, and a minimum of financial obligations.”
Which are the very people who are hurt by an increase in the minimum wage because it makes it even harder for them to gain a foothold in the job market.
“Now, I find that situation quite curious, how is that a person can be working full-time and receiving the minimum wage [they are being paid the casual rate, so it's higher to account for no sick/annual leave etc] and still be receiving welfare? In essence the govt, through welfare payments, is subsidising what I think is a fairly immoral employment strategy.”
Yet the government taxes low-income earners who also get welfare, creating a pointless, expensive churning of money. The effective marginal tax rates for the poor are the highest in the country, so for every extra dollar they earn, they are taxed and thier welfare payment is reduced so that they’re rarely better off than before they got a pay rise. This government created ‘poverty trap’ is what I’d call “immoral” because it makes it exceptionally hard for people to work thier way out of thier situation. Increasing the minimum wage is nothing but a band-aid fix for the more fundamental problem of high EMTs.
Chris, I believe, I wouldn’t be in that situation until I had competitors that had the same skills as me that would be willing to charge less. I would say it will be a while before that situation occurs, if ever.
Desipis, I don’t think it is family allowance – I think it is reduced newstart allowance, based on their weekly earnings. As far as I know low-paid workers receive family allowance/supplements regardless of their weekly wage [??].
Fermi, in service industries, I don’t see how unskilled workers are harmed by having an increase in the minimum wage, where an employer simply charges more to accommodate rising costs.
I agree about the taxation situation harming the working poor, I’m not sure that we agree in the way in which they are harmed, but to be honest with you, I’m no expert.
Really I just wanted to offer some pay equity because the type of work I do is essentially labouring work in a field that some women find attractive, and I wanted to offer a labouring wage that has parity with what a male labourer would typically enjoy, it’s not like what I pay, and indeed charge my clients, is outrageously high.
The bloke that employs the women in the other workplace, just enjoys a more affluent lifestyle than me, that is what it comes down to really. Some employers don’t have trouble sleeping at night in a very comfortable bed, in a rather large house that has been paid for by paying the very least they are legally obliged to pay. That employer actually has more wriggle room on the margins than I have.
Also, I should probably apologise for personalising the discussion in this way, I’m increasingly aware that this site is quite intellectual and talks about things in the abstract – I’m just not very good at that. cheers.
Fermi {- Enrico me old mate!! – ah, Chicago, those were the days!!}
This poverty trap has been with us [or should I say, with the poor] for a long time, si? It must be dispiriting in the extreme. You’d think a Govt that seems to cogitate in $ would have come up with a way of moving away from it…..
Hasn’t ACOSS been campaigning on this? Any progress yet??
Poverty/low wages is surely an area, like homelessness Mr Rudd, where a social democratic government would be putting in big efforts, si?
Does Economics 101 still teach that people on low incomes spend all of their money and people on high incomes save money? So when you increase wage inequality you reduce the number of potential consumers for your products unless you are selling a essential product. Poor people spend money on housing, food and transport and not much else.
We glibly talk about the average wage being $58,000, while recognising that the median Australian adult income is $28,000 and the top quintile earn over $80,000.
An adult in Melbourne would spend $12,000 per annum on cheap housing, cheap food and zone 1 transport, no booze, coffees, eating away from home, tobacco, drugs, clothes, mobile phone and in good health. Mobile phone is probably another $3000 per year.
I would argue that low wages reduces many businesses opportunity to find a market for their product or service thus reduces the numbers in employment.
A lot of people here as missing the flow on effects of a change in the minimum wage. If the minimum wage increases there is upward pressure on wages in other industries as well. These increases in wages help to reduce peoples real debt burdens, and reduce uncertaintys about future real incomes. They thus lead to increased consumption and aggregate demand. You cant look at the supply side and ignore the demand side, its stupidity.
“People are willing to accept a low wage for a variety of reasons”
Yes, like needing to eat, or needing to feed their kids, or needing a roof over their heads. People are “willing to accept” a low wage when they don’t have a choice. Not everyone had the ability to or the circumstances in which they could start their own business, not everyone has the skills – or even the ability to learn the skills – to get a job that pays more than the minimum wage.
Nope. A real example of “no choice” is when they don’t even have the option of the low-paid job, because some well-meaning person has eliminated it with minimum wage legislation.
“They remind me of the RWDBs in the runup to the Iraq invasion who kept calling us all traitors and appeasers rather than engage with the arguments.”
It’s worse than that – it’s like climate change denialists.
The overwhelming weight of empirical evidence and empirical literature is either ignored or dismissed as a vast conspiracy committed by ideological zealots and vested interests. Where the real, ‘true’ evidence is found in relatively obscure, minority position research and where all nuance is lost – where things can only be either A or B but not some mix of grey.
Complexity is frowned upon in favour of simplistic anecdotes – and like climate scientists are dismissed by Deniers as having ulterior motives, economists are similarly dismissed – conveniently ignoring the fact that for the overwhelming majority of economists, the one personal belief they do have with their research is pursuing the net-benefit of human welfare.
And just as climate deniers think geologists are the true climate scientists rather than *actual* climate scientists, here we have varying flavours of social science and IR specialists being considered the true economists.
Bah…. it would be funny if it wasn’t so predictable in its *politics* – which at the end of the day is pretty much what all this huffing and puffing and misconceived righteousness is about.
Question:
Out of the 20 top (richest) OECD countries which one has the lowest government spending on social benefits (the social wage), one of the lowest levels of taxation and the most regressive taxation system, the lowest rate of unionisation, the lowest incidence of collective wage bargaining, the highest level of income inequality, one of the highest poverty rates (including child poverty), where workers work the longest hours for the lowest minimum wage rates?
Answer:
The United States
http://www.stateofworkingamerica.org/
“because you think there are certain circumstances in which a cut in real minimum wages is warranted, you must be a corporate shill engaged in a plot against the working class.”
DD at 44, surely your argument is more specific than a vague motherhood principle that there are ‘certain circumstances’ when a wage cut is warranted. You are arguing that in the current circumstances a wage cut is warranted. Or have I got you wrong?
I’d be more comfortable with the argument of maintaining a lower minimum wage if I didn’t think it affected women more than men. I don’t know any males on the minimum wage, whereas most of the women I know are stuck with it. The system is bullshit and it’s sexist.
“Nope. A real example of “no choice” is when they don’t even have the option of the low-paid job, because some well-meaning person has eliminated it with minimum wage legislation.”
Rubbish. That’s an argument only put by people who want to keep as much money as possible in their own greedy pockets, by paying others as little as possible and getting rich from the proceeds of their labour.
And it seems to me you’re arguing that the end – lower unemployment – justifies the means – keeping people in poverty and refusing to pay them a decent wage for a decent day’s work. Always a slippery thing to argue, even if it was true that higher wages for minimum wage workers made unemployment go up, which has by no means been demonstrated.
I say we should raise the minimum wage to $30 per hour, surely everyone would be better off then!
Don’t stop there Fermi – let’s make everyone rich and lift it to $100 an hour!
We need a living wage, not a minimum wage and an overhaul of a still very regressive taxation system. We don’t want to completely go the American way where those making the most profit, the greediest most exploitative individuals and corporations effectively pay no taxes and no one is even trying to make them!
We also need a resurrection of the notion of the “social wage”. Two income families with three kids shouldn’t have to wait for a year to have the pins removed from a child’s fractured leg because they can’t afford to pay the $7000 it would take to have it done more quickly in the private health system.
Nor should recently arrived immigrants have to live 16 to a three bedroom house when all the adults have full-time jobs in the service and hospitality industries.
Don’t stop there Possum – accuse those who hold different views of being akin to climate change denialists!
Oh, sorry, you’ve already done that. My apologies
It is the classic prisoners dilema. If I cut wages in my business and my competitors don’t I have an advantage. If we all cut wages somebodie’s market contracts and their profit drops. The trick for the sleazy is to cut the wages of those who don’t use your product only.
I am sceptical about the effect of freezing the minimum wage, particularly in a recession that had as one of its root causes a reduction in the % of GDP going to low income earners.
However, I am not sceptical about the effect of changing wage differentials on who gets employed. For example, in my industry it made sense to use trade assistants when they were paid 70% of the tradesman’s rate. However, once the mining unions won wage agreements that allowed TA’s to get closer to the tradsmen’s rate it made more sense to replace the tradesman/TA team with a two tradesman team. For the same reason washery operators with 3 yrs of high school were replaced by better educated tradesman operators who could solve more difficult problems as well as do trade jobs when required.
Since I started work in 1960 a lot of jobs that were done by people without much physical or mental aptitude have now been merged into jobs that require much more. The problem is not so much that the minimum wage is too high but that some pay differentials have become too small to make it worthwhile for an employer to put up withthe inconvenience of employing someone who is only able to clean.
It might be useful to this discussion if we separated out the various questions that are being discussed. Questions that I can see include:
1. Does it make sense to increase total purchasing power during this recession to stimulate the economy? (Anyone arguing against this?)
2. What mix of strategies should be used to increase or decrease total purchasing power?
3. Does it make sense to reduce inequality to boost the economy, improve social justice or the quality of life in the community?
4. Are there special cases, such as the examples discussed above, that should be excluded from any drive to reduce inequality?
5. What mix of strategies should be used to reduce inequality?
6. What mix strategies should be used to improve the chances of people without much physical or mental aptitude?
7. What changes need to be made to our education, training and skill evaluation systems to better prepare people for a rapidly changing world and facilitate rapid redeployment of people when the reured skill mix changes?
I’m glad it pinched Anthony.
John D, “It is the classic prisoners dilema. If I cut wages in my business and my competitors don’t I have an advantage.”
Actually, not *quite* accurate – if you cut wages and pocket the extra returns, you don’t have a competitive advantage, you just have more profit. If, however, you cut wages and pass the savings on to your customers in the form of a cheaper product or service, THEN you have an advantage. You may or may not make extra profit.
And of course the second part of your statement is quite true – “If we all cut wages somebodie’s market contracts and their profit drops. The trick for the sleazy is to cut the wages of those who don’t use your product only.”
But not everything boils down to economics, we just like to pretend it does.
Who decided that academics sitting around talking about what’s good for the robots and serfs should earn something more than the minimum wage?
Ah, Adrien’s soulmate the Duke of Misogyny aka La de Da John Greenfield joins us.
The deeply untalented terminally incoherent man who is so desperate to place his pimply carcass in an academic’s chair he’s singing the praises of Eton no less over on skepticlawyer/legal eagle’s blog.
One fucked up dude who can’t even refer to us women without mentioning the pox.
Possum I *think* you’re having a go at those of us who think there is a substantial body of evidence in the economic literature on this topic – though I’m not sure because of the tone in your post. I’m really not sure if it is analogous to climate change science … but in any case, neither I, nor Mark, nor John Quiggin ever denied any employment effects regarding the minimum wage. The evidence from some, but not all, US empirical studies suggests that raising the minimum wage will indeed have some effect on unemployment levels. We’re simply saying that the effects of minimum wage increases on low-wage unemployment are far smaller than many of the commenters here seem to assume. So I don’t think there’s any simplistic denial going on at all here.
Further, climate scientists have taken great painss to explain the mistakes of climate skeptics in interpreting the observed termperature data and so on … has anyone on this or the previous thread actually engaged with the Card and Kreuger study, or the competing Neumark and Wascher study? Might be worth debating the literature rather than than calling each other names …
Ben, you have to be very careful about citing only US studies of the impact of minimum wages on employment because the impact of the minimum wage on employment levels (and the impact of increases) is likely to be far smaller at low levels. The real value of the US federal minimum wages is considerably lower than it is in Australia.
In the previous thread I discussed why the Card-Kreuger study is of limited relevance to the Australian labour market (even they acknowledge that the zero elasticity they find is likely to apply only in cases where the minimum wage is very low) and the fact that their zero elasticity finding hasn’t been replicated in other studies.
Many of the commentators here have written as though the idea of anything other than a zero elasticity is right-wing conspiracy.
There are a wide range of estimated elasticities in the literature for the young and relatively unskilled but almost none are zero and most are closer to 0.5. That means that there are meaningful employment effects. Elasticities are likely to be even higher during economic downturns when productivity growth is weak and cost increases are harder to pass on.
My point is that if there is a better option available, why not use it?
I wonder how many commenters arguing for the benefits of decreasing the minimum wage (in real terms) are currently trying to live on it.
just asking..
Can’t comment on behalf of others, but I’ve spent most of my life on what seemed at the time a fairly minimum wage (though was unaware of the concept of a “minimum wage”)
1995 I worked for $14,000 & thought my throat was cut, then in 1996 worked for just over $6,000. In 1982 for $4,300 and most of the 1980’s for $2 per hour. Most of the 1990’s I worked for $300 – 350 per week, unlimited hours.
Have never bothered to check (or care) if these are anywhere near “minimum wage” (if such a thing existed at those times)
This has not coloured my views on minimum wage any. I feel minimum wage is way too low. Just as I feel that the alternative (welfare/dole) is way too high.
I advocate neither for or against the FPC decision. I just roll with the punches, as have I always.
Most times I have felt my bosses could have easily stood to pay me more. However the years I have listed above (82, 95, 96) were the only times I didn’t feel I was working at way below market rate, and were also the times I empathised with my bosses & felt for them, at having to pay me such a (seemingly) large slice of their income.
I am not a believer in bitching about the hand one perceives onself to have (deservedly or no) been dealt. I have yet to reduce myself to the alternative to working (dole) but you never know what tomorrow will bring.
“I have yet to reduce myself to the alternative to working (dole) but you never know what tomorrow will bring.”
Indeed. It is only then that your feeling that “the alternative (welfare/dole) is way too high” would be properly tested.
Like many with no experience or understanding of something, you may well regret what you previously wished on others less fortunate than yourself.
Steve, not everyone can live on next to nothing. But since you seem happy to do that, good on you. And if you ever do find yourself on the way-too-generous dole, remember that you can always donate the excess part to charity.
A big part of that is family – not everyone has a partner who’s happy to live very cheaply indeed, and kids really suck at it once they start to socialise and discover what their peers spend.
FWIW, I *can* (and have) lived on very little, but I’d rather not. I typically spend ~$1000/mo living quite comfortably in Sydney or Melbourne. Which is handy for those times I’m not in paid work as any savings go quite a long way. But part of that is because when I am earning I earn a lot and buy stuff that lasts. So there’s a kind of hidden income in all the decent stuff I have that just works and doesn’t need to be replaced.
Aha Moz. The Samuel Vimes ‘Boots’ Theory Of Socio-Economic Injustice.
For those unfamiliar from http://en.wikipedia.org/wiki/Sam_Vimes
Sweden has no nationally legislated minimum wage. To meet their equity goals they use transfer payments instead. Denmark has some very liberal rules regarding hiring and firing and essentially nothing comparable to our unfair dismissal laws. Perhaps in some ways we should be a bit more like Sweden and Denmark.
Technically, Australia doesn’t have a legislated minimum wage either, in that the parliament doesn’t legislate a dollar amount. As I understand it, Sweden has collective agreements that set minima across sectors for different grades of work, and employees get the benefit of these whether they are members of the unions who are signatorties to the agreement or not. So Australia is – or was – a lot like Sweden. Awards, rather than collective agreements, set minima for different types of work across industries, and employees got the benefit regardless of whether they were members of the union which was party to the award. It’s just that the award (which was usually partly the outcome of baragining and partly the outcome of conciliation and arbitration) gained its legal force from the federal legislation.
Having a Fair Pay Commission changed that a bit, but we still didn’t go down the path of a single, directly legislated minimum wage. Now pay minima are going back into awards and will be set by Fair Work Australia.
Denmark offsets its dismissal regime with very geenrous unemployment benefits and active labour market policies, so the cost of dismissal for a worker is not as great as in Australia. I’m not sure what you mean by saying Denmark has very liberal hiring rules. Aren’t Australian employers allowed to hire pretty much who they choose, or not hire at all, as long as they respect anti-discrimination laws?
LO, yep a lot of people have attacked the Card-Kreuger study. I must admit I didn’t follow the other thread right through the 200-odd comments … anyway I’m not denying there are labour effects of minimum wages, although 0.5 seems high … most of the figures I have seen are between 0.15 and 0.4.
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I would be interested to know what you think about the “stickyness” of employment, in the sense that employers are generally loathe to lay off workers if they can avoid it, but then after lay offs reluctant to put on staff as business swings up.
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In the main I think we agree on more than you might think; I am a big fan of the Low Income Tax Offset for example and I agree that much more needs to be done to address high marginal tax rates for those working part-time while on benefits and moving from welfare to work.
The low income tax offset (LITO) achieves nothing that couldn’t be done with a higher tax free threshold. LITO is a silly approach that obscures real effective marginal tax rates (EMTR) from the average citizen. It ought to be done away with entirely and a higher tax free threshold put in place instead. Along with the senior Australians tax offset (SATO) and family tax benefits (FTB-a and FTB-b) it is a significant source of tax complexity and obscurity.
The higher tax-free threshold is what I’d like to see too. If that were lifted and pay inequity for women were addressed, I think we’d be getting somewhere.
This look interesting,so far.
If it’s not just all bots here, let me know. I’m looking to network
Oh, and yes I’m a real person LOL.
See ya,
Anthony – Setting wage minimums through enterprise bargaining is a heck of a lot more flexible than setting it nationally.
Terje, what I was pointing out was that neither Australia nor Sweden relies on a single legislated minimum wage, but that both awards and Swedish collective bargains were industry-based (not enterprise based) and set minima for all grades of work within the industry sector. To the extent that the FPC determined rates for the entire pay and classification scale, which was drawn from award rates, it was doing something similar. As of 1 July, industry-based award minima have been reinstated.
The difference is that Swedish sectoral agreements are the outcome of bargaining, whereas modern award rates are not. And any Australian union that tries to bargain a sector-wide agreement (rather than a single enterprise agreement) will usually fall foul of the Labor government’s prohibition on ‘pattern bargaining’. So perhaps we should indeed be a bit more like Sweden.
Terje’s proposition for a minimum wage floor designated by region sounds appealing until you realise it denies labour mobility and a freedom of choice to move from one region to another simply because it will always be beyond one’s means.
Good point Senex. And countries with the lowest minimum wage rates with the worst mass public transport system not uncoincidentally have the least labour mobility. The US certainly compares poorly today on labour mobility to the other top OECD countries and probably, ironically enough, compares poorly to the labour mobility existing and possible in America a century ago.
“Low-Paid Workers Cheated” (from today’s Advertiser)
http://www.news.com.au/adelaidenow/story/0,22606,25805646-5006301,00.html